Fairy Tale Economics

  • The economy: The best of times (Worst incoming?)
  • The World: Who’s trying to stoke a wider conflict?
  • The magnificent seven (or six, five, etc.)
  • Taco Tuesday for all!
  • Second thoughts on reverse ATMs

1The Economy: The Best of Times (Worst Incoming?)

Mainstream financial media are giddy this morning with the news that “the U.S. economy” as measured by GDP grew an annualized 4.9% during the third quarter — the fastest pace since late 2021, and stronger than Wall Street economists were expecting.

Sigh… It’s at this time we’re compelled to remind you that GDP is a meaningless statistical abstraction. It has no bearing on your life or your standard of living.

Just one example cited last year by PayPal founder and venture capitalist Peter Thiel: A stay-at-home mom contributes nothing to GDP. But if Mom goes to work and hires a nanny, suddenly you’ve got three wage-earners contributing to GDP and not just Dad. GDP is higher… but does the couple’s standard of living improve? Maybe, maybe not…

For another thing, the formula for calculating GDP puts way too much emphasis on consumer spending and far less emphasis on savings — even though savings are the seed corn for future prosperity.

Sure enough, there’s CNBC raving about how this morning’s number was “buoyed by a strong consumer in spite of higher interest rates, ongoing inflation pressures and a variety of other domestic and global headwinds.”

Or is it a case that growing numbers of consumers are spending out of an empty pocket? And how long can that last? As Paradigm’s Zach Scheidt mentioned here yesterday, the delinquency rate on subprime auto loans is the highest on record.

Meanwhile… a rock-solid reliable recession indicator just flashed red.

The Philadelphia Fed state coincident index is an obscure but revealing economic yardstick. It takes four different employment metrics from all 50 states and mashes them up into a composite on a scale from plus-100 to minus-100.

Any number lower than plus-50 suggests a recession is getting underway.

Going back to the “double-dip” recession of the early 1980s, this index has demonstrated a knack for calling recessions just as they’re coming on. It even sniffed out the onset of the COVID recession with a plus-44 reading in December 2019.

The September figure came out yesterday — and it’s plus-26.

One caveat: This number is frequently subject to revision. With additional incoming state-level data, the final September figure might well be higher.

2The World: Who’s Trying to Stoke a Wider Conflict?

Meanwhile, a threat that’s been hanging over markets for the last three weeks remains in play — that the latest conflict in the Middle East will spill beyond Israel and the Gaza Strip.

Paradigm macro maven Jim Rickards spelled it out succinctly this week on X-formerly-Twitter…

Jim Rickards

Israel has yet to carry out its much-publicized ground invasion of Gaza that was supposed to get underway two weekends ago — supposedly because of pressure from Washington. But why?

We’ll come back to that question shortly. But first…

Someone — or a group of someones — continues to stoke tension between the United States and Iran via The Wall Street Journal.

Two days after the Hamas assault in Israel on Oct. 7, the Journal splashed a huge “scoop” onto its front page — citing a source within Hamas as saying Iranian security officials helped plan the attacks in Israel during a meeting just days earlier.

Immediately hawkish politicos like Senate Republican Leader Mitch McConnell were citing the story to support the use of force against Iran.

But journalists at other outlets were skeptical. It turns out the lead reporter on the story has a sketchy career history. Days later, the Semafor news site reported that several other Journal reporters objected to publishing the piece without more confirmation.

No matter: The same reporter is back this morning with another front-page story asserting that hundreds of Hamas fighters trained in Iran before the attack. The sources here are “people familiar with intelligence related to the assault.”

That’s all we’re given to go on? What nationality are these “people familiar”? Maybe that would give us an indication of what ax they’ve got to grind. But no, we don’t even get that much.

All we know is that someone with an agenda is trying their damnedest to plant the narrative that Iran had a direct role in the attack.

Back to the question: Why is Israel holding off on the ground war in Gaza?

Well, recall what we told you on Oct. 13 as Washington began amassing a substantial flotilla of naval and airpower in the eastern Mediterranean: The only plausible target is Iran, seeing how Hamas has no navy or air force.

As the military analyst William Schryver sees it, leaders in Washington don’t want the Israel Defense Forces unleashed on Gaza; they want the IDF to instead “serve as a proxy to attack and severely degrade Iran's surrogates in Lebanon, Syria and Iraq.

“Having expended their #MotherOfAllProxyArmies in Ukraine without achieving the objective of weakening Russia, the Masters of Empire have lowered their sights and now aspire to expel Iranian power from the Levant.”

But Schryver says the Israeli military is no longer the juggernaut that achieved its stunning victory over Egypt, Syria and Jordan during the Six Day War in 1967.

“If the U.S. aims to drive the Iranians back east of the Tigris,” he concludes, ”they will have to shed a lot of exceptional American blood to do it. Most concerningly, they will inevitably run into the Russians along the way.”

Yikes.

Just a reminder in case you missed it yesterday: Jim Rickards plans what he calls “a massive announcement about the ongoing conflicts abroad — one that could have a profound impact on you and your wealth in the coming months.”

The announcement is set for Sunday at 6:30 p.m. EDT. To help readers prepare for the event, he’s set up a private “War Forum” — complete with a direct-to-reader TacChat feature at the bottom of the page. Follow this link, enter the password Patriot1 and you’re good to go.

3The Markets: The Magnificent Seven (or Six, or Five…)

Slowly, the Magnificent Seven is starting to be pared down to the… Magnificent One?

It’s been a rough stretch in late October for most of the seven companies that have powered the S&P 500’s gains so far during 2023.

Last week, Nvidia got caught in the crossfire of the semiconductor wars between Washington and Beijing. Then Tesla reported a 44% drop in third-quarter profit.

Yesterday, Meta delivered terrific quarterly numbers — but lousy guidance for the future. At last check, shares of Mr. Zuckerberg’s company are down 3.5% on the day.

The day before, Alphabet missed analyst estimates on revenue for its all-important Google Cloud unit. GOOG shares tumbled 9.6%, their worst one-day performance since March 16, 2020 — the day Donald Trump authorized COVID lockdowns.

But Microsoft is hanging in there: Late Tuesday it delivered a “beat” on both earnings and revenue, with MSFT shares rising 3% on a day the rest of the Nasdaq soiled the bed. The Street was especially impressed with the performance of MSFT’s cloud unit — in contrast with that of Alphabet.

Jim Rickards’ senior analyst Dan Amoss listened to both the MSFT and GOOG conference calls. The difference between the two, he says, is that Microsoft is exercising more “capital discipline.” In other words, Microsoft is less prone than Alphabet to frittering away its research and development funds on projects with an uncertain payoff.

Amazon will report its numbers after the closing bell today. As you might be aware, AMZN too is highly dependent on its cloud-computing business; really, AWS is its cash cow.

Meanwhile, something interesting is happening with the broad stock market today…

At last check, the Nasdaq is down another 1%, thanks in part thanks to the disappointment with Meta; yesterday with the help of Alphabet, the Nasdaq it sank into “correction” territory, down 10% from its most recent peak three months ago.

The S&P 500 is down nearly a half percent to 4,168 after falling yesterday below its 200-day moving average. The Dow is marginally in the red, but back below 33,000 for the first time since May.

But small caps are rallying — the Russell 2000 up 1% as we write. IWM, the Russell 2000 ETF, is up nearly two bucks to $165.45.

As you might recall, colleague Sean Ring is eyeing the $161–162 level as IWM’s “line in the sand” — any lower, and it likely spells trouble for the rest of the stock market. But for now, that level’s still holding.

Still other asset classes continue to trade at make-or-break levels.

The yield on a 10-year U.S. Treasury note jumped back above 5% on Tuesday, and it’s at 5.05% this morning.

The spot gold price sits nearly unchanged at $1,979 while gold futures sit tantalizingly just below $2,000. Spot silver is down a bit to $22.69.

Bitcoin is just barely holding the line on $34,000 after the big jump earlier this week — perhaps fueled by BlackRock’s ballsy gambit to announce a ticker symbol for its spot Bitcoin ETF even before the ETF wins formal approval from SEC regulators.

Crude is down nearly 2% and back below $84. The October run to $90 didn’t have any staying power, but the long-term trend remains bullish as global demand exceeds global supply by a couple million barrels a day.

One other economic number of note: Durable goods orders jumped 4.7% in September, goosed by orders for commercial aircraft. If you back out aircraft and military hardware, the number for “core capital goods” was also better than expected, up 0.6%.

4What’s in a Name? Taco Tuesday for Everyone

As of this week, no one anywhere in America holds ownership rights to the phrase “Taco Tuesday.”

Maybe you were unaware, but the Wyoming-based Taco John’s chain trademarked the expression in the late 1980s. In the following decades, it regularly sent cease-and-desist letters to other restaurants using the term.

Earlier this year, the much larger Taco Bell petitioned the U.S. Patent and Trademark Office to cancel the Taco John’s trademark. Taco Bell even recruited NBA superstar LeBron James to the cause — seeing as Bronny and his family made Taco Tuesday a thing on social media several years ago.

Over the summer, Taco John’s gave notice that it would no longer fight the petition. The phrase was available for all to use in 49 of the 50 states.

But not New Jersey — where Gregory’s Restaurant & Bar on the Jersey Shore held the trademark.

As recently as August, owner Greg Gregory promised to keep up the fight. But this week he gave it up — even going so far as allowing himself to be quoted in a Taco Bell press release. "Taco Tuesday has always been a source of pride for my family and our restaurant,” he said, “but we recognize Taco Tuesday is widely celebrated and embraced beyond our four walls."

More likely it was Gregory’s lawyers who “recognized” the phrase’s widespread use. Way back in 2019 we cited legal experts saying Taco John’s was on thin ice with its insistent nastygrams. "It has become such a common phrase that it no longer points to Taco John's,” attorney Michael Atkins told The Associated Press.

5Mailbag: Second Thoughts on Reverse ATMs

First, a thank you to the readers who wrote in with ideas about how I can resolve the gas-fireplace conundrum that I related here Monday.

I don’t have any updates yet, but my wife and I refuse to let it remain non-functional indefinitely. It’s more or less the focal point of the living room, after all. (Also we have aging cats who enjoy the steady level of warmth it gives off.)

Meanwhile, we heard from a reader with an extensive take on reverse ATM schemes. We had to truncate it for length, but she still has some intriguing thoughts…

“My thought is that businesses that set up these cash-to-card kiosks will encounter many of these same problems the machines are supposed to solve,” she writes:

“1. Expensive: They will have to load the machines with the card based upon estimated usage levels.

“2. Inefficient: Customers will have to at various times have to stand in line to use these cash-to-card machines. Then they may have to wait in line at the retail register to pay for the items they are purchasing.

“3. Security issues: Who will remove the cash from these vending machines? Is it the company that owns them or is there some sort of arrangement with the retail establishment that has them in their store? Also there is the security issue of someone behind the customer that is using the cash-to-card machine being robbed. It would not be too difficult for a snatch-and-run situation.

“4. Abuse and fraud: You still have the situation where the individual or two individuals are emptying the cash from these machines stealing some or all of the money. You would still need a security camera.

“5. Germs: The card will pick up germs from those that handle the cards: the individual who loads the machines with the cards, the customer who purchases the card and the retail employee who handles the card and then returns it to the customer.

“What liability will the cash-to-card company have if the machine fails to operate properly, e.g., correctly read the value of the paper and/or coin or the machine jams, keeping the money but not issuing the card? Will there be a number for the customer to call if the machine fails to operate, like there is on ATMs?”

Dave responds: All good questions. Presumably the company pushing these machines has thought them through. Then again, maybe the company borrowed its seed capital a few years ago at bargain-basement rates and didn’t think them through.

Low borrowing costs drove all manner of “malinvestment” over the last 15 years. (WeWork, anyone?)

With interest rates rising and many business loans resetting in the next 24 months… well, could get interesting.

Best regards,

Dave Gonigam

 

 

 

 

Dave Gonigam
Managing editor, Paradigm Pressroom's 5 Bullets

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